The yen briefly hit record highs versus the dollar on Thursday as quake-hit Japan's nuclear crisis unleashed a global risk sell-off, while world stocks traded higher after Tokyo stocks came off earlier lows.
Risk aversion fanned expectations Japanese investors would sell overseas assets, including lucrative carry trades, to bring home funds. The yen rose as high as 76.25 per dollar, levels which raised intervention concerns.
Developments at Japan's quake-hit nuclear plant remained a main source of worry for investors. Japanese military helicopters dumped water and a water canon was also used to douse an overheating nuclear reactor but radiation levels at the plant remained high.
There is short covering at this point, and we continue to see outflows, said David Thebault, head of quantitative sales trading, at Global Equities, in Paris.
Stocks might look oversold on the short term, but they are not if we're heading into a bear market. The Japanese crisis could have severe consequences for the global economy.
MSCI world equity index rose 0.3 percent, moving away from this week's three-month low. It hit 30-month highs in mid-Feb but it has erased all of this year's gains.
Tokyo stocks fell 1.4 percent, recovering from the intraday low as cheap valuations attracted foreign buyers. Earlier this week, Japanese stocks suffered their worst two-day sell-off since 1987.
The Thomson Reuters global stock index was steady on the day. The FTSEurofirst 300 index rose 0.6 percent as a recent sell-off attracted bargain hunters.
U.S. stock futures rose 0.7 percent, pointing to a firmer open on Wall Street later after its fear gauge, VIX, hit 29.40 on Wednesday, its highest since July.
A deterioration of the nuclear situation via a significant increase in radiation levels would lead us to review our positioning, said Paul Marson, chief investment officer of Lombard Odier Private Bank.
But if the authorities manage to contain the situation, the Japanese equity market would appear to be extremely cheap by historical standards in a particularly loose monetary environment.
Emerging stocks fell 0.7 percent.
U.S. crude oil rose 1.8 percent to $99.78 a barrel as investors focused on concerns about potential supply disruptions from an escalating turmoil in Bahrain.
Bahrain arrested at least six opposition leaders, a day after its crackdown on protests by the Shi'ite Muslim majority raised fears of a regional conflict.
In European trading, the yen was trading at around 78.50 per dollar. Traders said a break of 79.75 on Wednesday unleashed a sharp selling of the dollar.
Japanese margin traders were cited as one of the main factors behind the move as stop-loss orders were triggered in their leveraged bets in currencies like the Australian dollar.
Traders also said foreign investors were scrambling to get hold of yen to settle margin calls on bets on Japanese shares, forcing them to turn to spot currency at times as well as forwards and cross-currency swaps.
Japan's finance minister Yoshihiko Noda blamed speculation for the yen spike and said he was closely watching markets. Group of Seven finance leaders and central bankers will discuss possible steps to calm markets at 2200 GMT.
G7 finance ministers are not expected to agree firm policy action, a G7 source said.
The dollar hit a four-month low against a basket of major currencies. The euro rose to a four-month high of $1.4014, boosted by solid demand at a Spanish bond auction and on the view euro zone interest rates may rise as soon as April.
Spain sold 4.1 billion euros of debt, drawing solid demand although yields for the 30-year bond rose.
German government bond futures fell 30 ticks.
(Additional reporting by Blaise Robinson; Editing by Ron Askew)